Investor Column | Health savings accounts as a legacy planning tool

While the intent of the SECURE Act (see my article from January) was to make saving for retirement easier for the general public, there was a downside in this legislation for those that had planned to leave a legacy for their heirs: the “stretch IRA” was effectively eliminated.

Previously, those that inherited IRAs were able to extend required minimum distributions (RMDs) out over their entire lifetimes, which effectively added to that beneficiary’s own retirement plan and provided more opportunity for the IRA account to grow tax-deferred for a longer period of time. Now, post SECURE Act, all IRA beneficiaries - except spouses – must have the entire IRA account paid out to them within 10 years of inheriting it.

By eliminating “stretch IRAs,” Congress has made IRAs much less attractive to inherit and caused most financial planners to take a second look at their clients’ estate plans and evaluate other strategies for leaving legacies to their heirs. One of the vehicles getting increased consideration is a little-known provision in the current health savings account (HSA) legislation that allows individuals to provide tax-advantaged funds to their beneficiaries.

HSAs are medical savings accounts that allow account holders to save money for health-care costs for themselves and their families. Account holders can use their funds to pay for current medical expenses, or they can invest them and create medical “nest eggs” to cover future health-care costs. Contributions into the account are tax-deductible. If withdrawals are used for qualified medical expenses, they are tax-free. This combination of tax advantages means HSA account holders can likely effectively lower their overall health-care costs than those who don’t.

Most people contribute to their own HSA accounts, but anyone can make contributions into an eligible account holder’s HSA on their behalf. Contributors into the account don’t have to be HSA-eligible themselves. It only matters that the HSA account holder is eligible to receive contributions. Therefore, a parent is able to fund their child’s HSA annually up to the IRS contribution limit, giving the child a tax-advantaged “bonus” that could be used to pay for current medical expenses or invested for future medical expenses in retirement. The best part is that the parent’s HSA contributions for their child are tax-deductible - even if they don’t itemize their deductions. Now that’s a nice legacy gift!

To learn if you are eligible to open an HSA, go to: https://healthsavings.com/about-hsas/eligibility/ Single eligible HSA account holders can contribute up to $3,550 to their account in 2020, or up to $7,100 if they have family coverage.

Parents who contribute to their child’s HSA are effectively setting up a “safety net” for them in the event of any unexpected medical expenses – especially if that account is invested and allowed to grow over time. And since HSAs don’t have required minimum distributions, these accounts can potentially keep growing for a long time until they’re needed down the road. HSA accounts can also be passed on to the account holder’s own beneficiaries. When inherited, the account beneficiary can use the money tax-free to pay for qualified healthcare expenses, even if they are not enrolled in a high-deductible health plan.

While this strategy may not replace the benefits of the former “stretch IRA,” it does add to the menu of estate planning choices when planning for one’s legacy. Talk to your financial planner for further details to see if this strategy might work for you.

Karin Grablin is with SRQ Wealth, 1 N. Tuttle Ave/, Sarasota 34237, 941-556-9004. www.srqwealth.com.

Securities offered through Cetera Advisor Networks LLC, a Broker Dealer, Member FINRA/SIPC. Investment advisory services offered through CWM, LLC, an SEC Registered Investment Advisor. Cetera is under separate ownership from any other named entity. This article is designed to provide accurate and authoritative information on the subjects covered. It is not, however, intended to provide specific legal, tax, or other professional advice. For specific professional assistance, the services of an appropriate professional should be sought.